M4 BARRON’S February 22, 2021
EUROPEAN TRADER
D
ay trading has exploded
among a new generation of
retail investors —and U.K.-
based online platformIG
Group Holdingsis hoping to catch the
wave.
In its biggest acquisition ever, IG
(ticker: IGG.UK) is spending $1 billion to
buy Chicago-based Tastytrade. The finan-
cial network offers online streaming of
market commentary and trading strategies
on its own website and other platforms,
while its Tastyworks brokerage arm gives
clients the ability to trade stocks, options,
futures, and cryptocurrencies.
The deal is the first big strategic move
by June Felix, who took over from Peter
Hetherington as chief executive officer
of FTSE 250–listed IG Group in 2018.
The question for investors is whether
the acquisition comes near the top of a
short-lived Covid-inspired boom in trad-
ing at home, or hitches IG to a long-term
shift in how retail investors engage as
traders.
“We are confident that there is a long-
term shift in self-directed investing and
trading. The U.S. is a critical market with
big promise, and Tastytrade is a high-
margin, high-growth business estab-
lished by trading veterans with a record,”
Felix tellsBarron’s.
The market is certainly hot: Amateur
traders stuck at home for months have
embraced not only stock trading but also
plunged into riskier options bets, helping
to drive volume to record levels in 2020
while inflicting losses on a string of so-
phisticated hedge funds.
U.S. options trading hit its highest vol-
ume month ever in December, according
to Jefferies, and that pace has continued
in January. The market has expanded at a
24% compound annual growth rate since
2017, with Tastytrade increasing at three
times the market over the same period.
The U.S. currently makes up about 4%
of IG’s sales, but Tastytrade is expected to
make it the group’s second-largest mar-
ket. It will also add listed futures and
options to IG, and has already added for-
eign-exchange trading.
IG was founded in 1974 by Stuart
Wheeler, who died last year at age 85.
The company allowed small investors to
bet on commodities, currencies, stock
indexes, and sports. It listed on the Lon-
don Stock Exchange in 2000 and now
has a market value of almost 2.9 billion
pounds sterling ($4 billion).
Analysts have concerns about the
price IG paid for Tastytrade, and inves-
tors also seem unconvinced about the
deal: IG shares dropped as much as 9%
on the day the deal was announced,
though the stock is still up more than
12% over the past year. Tastytrade’s val-
uation looks full, at 18 times historic
earnings before interest, tax, deprecia-
tion, and amortization, or Ebitda, “in
what is likely to have been a year of su-
pernormal earnings,” Shore Capital an-
alyst Vivek Raja wrote in a recent re-
search note.
IG trades at about 8.5 times historic
earnings per share, and its U.K. rival
CMC Markets(CMCX.UK) at less than
seven times historic earnings.
There are other risks: Tastytrade will
diversify IG’s business, but will subject
the company to additional U.S. regulatory
supervision, said analysts at credit-rat-
ings firm Fitch Group.
“We are comfortable with the valua-
tion. If you look at the intrinsic growth of
Tastytrade, it has excellent potential and
there are clear synergies which we have
not yet outlined,” Felix says.
Market volatility helped drive up
IG’s trading volumes and client base.
The number of IG’s active clients rose
55% to 238,600 in the six months to
Nov. 30.
“We can’t control the market and we
can’t control volatility. But we can attract
the right clients,” Felix notes.B
By Lina Saigol
EMERGING MARKETS
Frontier Tech Stars Have
Momentum for Now
T
ired of reaping superprofits
from the Chinese internet?
Perhaps you suspect that
growth may be peaking atTen-
cent Holdings(ticker: 700.Hong Kong) or
Meituan(3690.Hong Kong). Adventurous
investors might look for the next breakout
tech star in second-tier emerging markets
like Turkey or Indonesia, or farther afield
to the likes of Nigeria and Kazakhstan.
The growth of the online economy has,
theoretically, greater scope in less devel-
oped countries. The fewer legacy banks,
credit cards, and stores, the more oppor-
tunity for new digital players to offer fi-
nance, payments, and shopping. This
leapfrog effect has played out spectacu-
larly in China. Now, it’s moving every-
where. “Fintech is the strongest substory
in the larger emerging tech story,” says
Kevin Carter, founder of theEMQQ
Emerging Markets Internet and Ecom-
merceexchange-traded fund (EMQQ).
A surprise darling is Kazakhstan-based
Kaspi.kz(KSPI.United Kingdom). Start-
ing with a bricks-and-mortar bank, this
company has developed a “super app”—
combining financial services, shopping,
and payments—that dominates its home
country of 19 million with eyes on 70 mil-
lion more customers across Central Asia
and the Caucasus. The stock has nearly
doubled since an initial public offering last
October. “Consumer banking penetration
in Kazakhstan is just 6.7% of gross domes-
tic product,” says Sandeep Srinivas, a fund
manager at frontier markets investor FIM.
“That is a long runway for growth.”
Safaricom(SCOM.Kenya) in Kenya is
a role model for frontier fintech with its
ubiquitous M-Pesa mobile payments net-
work. Its stock has gained a respectable,
by raging bull standards, one-third over
the past six months. But the market sen-
sation in Africa is Nigeria-basedJumia
Technologies(JMIA), which combines
payments with an Amazon-style e-com-
merce platform and logistics arm. Its
shares have quadrupled since October,
when renowned short seller Andrew Left
withdrew fraud accusations and called
the company a Buy.
If frontier markets are a leap too far,
you could look to Indonesia, where
shares in point-of-sale payments cham-
pionDistribusi Voucher Nusantara
(DIVA.Indonesia) have quadrupled from
a low point last May. The company has
already installed eight million Square-
esque systems, a first step toward
broader financial services for the “many
unbanked small businesses” across the
sprawling nation of 270 million, says
Jinjoo Hong, an equity sales broker at
Auerbach Grayson.
Her colleague Simon Mandel likes
Logo Yazilim Sanayi ve Tikaret
(LOGO. Turkey), a Turkish business soft-
ware provider that operates half the
country’s customer-relationship manage-
ment systems. It’s riding an analogous
wave of formalization in a big country
with a multitude of cash-based mom-
and-pop shops. Shares are up by half
sinceNovember.
Among companies that haven’t broken
out yet, Mandel suggestsSinqia
(SQIA3.Brazil), a Brazilian bank software
specialist, orFrontier Digital Ventures
(FDV.Australia), which owns two dozen
property and auto sales portals from the
Philippines to Paraguay. “Most of these
were previously in the red. They have
turned them profitable,” he says.
Alison Graham, chief investment offi-
cer at frontier investor Voltan Capital
Management, flags “the Expedia of Latin
America,” Argentina-basedDespegar
(DESP). Shares have doubled from a No-
vember nadir, but are still a bit off pre-
pandemic levels.
Bear in mind that these next-wave tech
pioneers can crash as well as soar. “Jumia
is the most volatile stock I’ve ever
owned,” says EMQQ’s Carter. But they
have momentum for the momentB
By Craig Mellow
IG Group Rides the
At-Home Trading Boom